Overdraft is a bank lending to an organization to pay operating expenses in the event that the borrower’s company does not have enough money on its bank account.
In this case, the use of the loan is granted at interest. When submitting an overdraft, the bank deducts funds from the enterprise account in full.
Overdraft differs from a regular loan in that all funds received to the company account are sent to pay off the debt. In some cases, the bank provides organizations with a grace period for using an overdraft, during which interest for using a loan is not charged. It depends on the policy of the credit institution.
For individuals, an overdraft is a loan provided by a bank that can be used by a borrower who has a temporary need for cash. At the same time, the borrower pays interest for using the loan.
List of documents for overdraft
The procedure for applying for an overdraft in each bank is established by its own. An approximate list of documents for obtaining a loan (overdraft) may look as follows:
- overdraft loan application;
- company profile;
- tax invoice number;
- additional identity document (optional: foreign passport, driver’s license, TIN;
- document confirming the existence of the organization’s income for several months.
Also, special requirements for granting an overdraft include:
- no overdue debts to the bank;
- the presence of continuous work experience;
- constant working place;
- permanent registration and accommodation in the territory served by the bank.
The period of continuous work experience required to obtain a loan is specified individually by each bank. Each bank reserves the right to determine the necessary package of documents for registration of a loan product.
In practice, the following types of overdraft are distinguished:
- salary overdraft;
- standard overdraft (classic);
- in-advance overdraft;
- overdraft collection;
- technical overdraft.
A salary overdraft is a type of overdraft that is tied to a bank card to pay wages.
To get this loan you need:
- be a regular customer of this bank;
- regularly debit salaries at this bank (i.e., the employer must transfer them regularly).
Note that if there is a salary card with an overdraft in case of job termination, the overdraft is automatically discontinued.
As a rule, the overdraft limit on the card is small. In the case if you go into the red, the overdraft limit is immediately blocked by the proceeds from the salary received on the account. The overdraft amount for this type of loan is determined based on the amount of salary (limit no more than 2 monthly salaries). The annual interest rate is 15% -20%.
In this case, interest will be accrued only for the days of using the overdraft and for the specifically spent funds.
Standard overdraft (classic)
A standard overdraft involves the granting of a loan within a fixed limit. These restrictions are shown in advance in the agreement with the bank.
A standard overdraft is used to the cost recovery. The limit for this type of lending is equal to the minimum monthly loan turnover on the borrower’s current account, divided by 2.
Moreover, the average anual interest rate is 14.5%.
In this case, the overdraft is provided mainly to reliable organizations with the aim of attracting enterprises for cash services.
The amount of the minimum overdraft provided by the bank is calculated based on the credit turnover in the client’s account.
Employees of a financial institution take into account the largest amounts received on the client’s balance for the previous 3 months, except for the funds received on the borrower’s balance from the accounts of other banks. Then the month with the minimum turnovers is determined, and loan repayments are taken into account, including interest payments, just like in the classic overdraft.
To calculate the limit, the minimum limited monthly loan turnover on the client’s account should be divided by three without targeted payments on repayment of loan debts and interest payments to creditor banks. The average annual interest rate in-advance overdraft is 15.5%.
In this case, the overdraft is granted to the organization, the turnover on the credit of the settlement account of which is at least 75% of the collected cash proceeds. The calculation also takes into account the earnings handed over to the account by the enterprise itself.
The amount of the limit for such an overdraft depends directly on the number of its debtors, on the size of the borrower’s turnover, the activity of crediting funds.
The overdraft limit for encashment can be calculated using the following formula: L = I / 1.5, where L is the limit and I is the minimum monthly amount credited to the client’s account. The average annual interest rate is 14.5%.
In this case, an overdraft is provided to the organization without taking into account the financial condition of the enterprise, with the account of guaranteed bank receipts of money to the borrower’s bank account.
Such cash receipts include the sale/purchase of foreign currency on the currency exchange market, the return of a term deposit. The limit is the minimum monthly income of the borrower, divided by 1.5. The average annual interest rate, in this case, will be equal to 15%.